INTRODUCTION TO COST AND

MANAGERIAL ACCOUNTING
CHAPTER 1 &2 MANAGERIAL ACCOUNTING 15TH EDITION
BY RAY H. GARRISON, ERIC W. NOREEN, PETER C. BREWER

COURSE: COST ACCOUNTING

INSTRUCTOR: MEHNAZ KHAN
Financial accounting is concerned with reporting financial
information to external parties, such as stockholders, creditors, and
regulators.

Managerial accounting is concerned with providing information to

managers for use within the organization.

Because of this fundamental difference in users, financial accounting

emphasizes the financial consequences of past activities, objectivity
and verifiability, precision, and companywide performance,
whereas
managerial accounting emphasizes decisions affecting the future,
relevance, timeliness, and segment performance. A segment is a part
or activity of an organization about which managers would like cost,
revenue, or profit data
• Planning involves establishing goals and specifying how to achieve
them.

• Controlling involves gathering feedback to ensure that the plan is being

properly executed or modified as circumstances change.

• Decision making involves selecting a course of action from competing

alternatives
Cost accounting is the sub-set of management accounting

Cost accounting is that branch of accounting which aims at

generating information to control operations with a view to
maximizing profits and efficiency of the company, that is why it
is also termed control accounting.

Conversely, management accounting is the type of accounting

which assist management in planning and decision-making and
thus known as decision accounting.

While cost accounting has a quantitative approach, i.e. it

records data which is related to money, management
accounting gives emphasis on both quantitative and qualitative
data

.
• Cost Accounting is a method of collecting, recording, classifying and
analyzing the information related to cost.

• The information provided by it is helpful in the decision-making process of

managers.

• There are three major elements of cost which are material (direct &
indirect), labor (direct & indirect) and overhead (Production, Office &
Administration, Selling & Distribution, etc.).

• The main aim of the cost accounting is to track the cost of production and
fixed costs of the company.
• This information is useful in reducing and controlling various costs. It is
very similar to financial accounting, but it is not reported at the end of the
financial year.
A direct cost is a cost that can be easily and conveniently traced to a
specified cost object.
An indirect cost is a cost that cannot be easily and conveniently traced to a
specified cost object.

Task: Identify some direct and indirect costs of textile manufacturing

Manufacturing Costs:
Direct Materials
The materials that go into the final product are called raw materials
Raw materials may include both direct and indirect materials.

Direct materials are those materials that become an integral part of the finished product
and whose costs can be conveniently traced to the finished product.

indirect materials are included as part of manufacturing overhead. Sometimes it isn’t

worth the effort to trace the costs of relatively insignificant materials to end products.
Direct Labor
Direct labor consists of labor costs that can be easily (i.e., physically and
conveniently) traced to individual units of product.

Indirect Labor:
Labor costs that cannot be physically traced to particular products, or that can
be traced only at great cost and inconvenience, are termed indirect labor . Just
like indirect materials, indirect labor is treated as part of manufacturing
overhead. Indirect labor includes the labor costs of janitors, supervisors,
materials handlers, and night security guards.

Manufacturing Overhead : includes all manufacturing costs except direct

materials and direct labor. Manufacturing overhead includes items such as
indirect materials; indirect labor; maintenance and repairs on production
equipment; and heat and light, property taxes, depreciation, and insurance on
manufacturing facilities
 Nonmanufacturing Costs

Selling costs include all costs that are incurred to secure customer orders
and get the finished product to the customer.
• These costs are sometimes called order-getting and order-filling costs.
Examples of selling costs include advertising, shipping, sales travel,
sales commissions, sales salaries, and costs of finished goods
warehouses. Selling costs can be either direct or indirect costs.

Administrative costs include all costs associated with the general

management of an organization rather than with manufacturing or selling.
Examples of administrative costs include executive compensation, general
accounting, secretarial, public relations, and similar costs involved in the
overall, general administration of the organization as a whole.
 Period Costs vs Product costs

When preparing a balance sheet and an income statement, companies need

to classify their costs as product costs or period costs.

The matching principle is based on the accrual concept that costs incurred
to generate a particular revenue should be recognized as expenses in the
same period that the revenue is recognized.
 Product Costs

• product costs include all costs involved in acquiring or making a product.

• In the case of manufactured goods, these costs consist of direct materials, direct
labor, and manufacturing overhead.
• Product costs “attach” to units of product as the goods are purchased or
manufactured, and they remain attached as the goods go into inventory awaiting
sale.
These costs do not become expenses until the company sells the finished goods
inventory. At that point, the company records the expense as cost of goods sold.

Product costs are initially assigned to an inventory account on the balance sheet.
When the goods are sold, the costs are released from inventory as expenses
(typically called cost of goods sold) and matched against sales revenue on the
income statement.
Because product costs are initially assigned to inventories, they are also known as
inventoriable costs .
 Period Costs

• Period costs are all the costs that are not product costs.
• All selling and administrative expenses are treated as period costs. For
example, sales commissions, advertising, executive salaries, public relations,
and the rental costs of administrative offices are all period costs.
• Period costs are not included as part of the cost of either purchased or
manufactured goods; instead, period costs are expensed on the income
statement in the period in which they are incurred using the usual rules of
accrual accounting
 Prime Cost and Conversion Cost

Prime cost is the sum of direct materials cost and direct labor cost.

Conversion cost is the sum of direct labor cost and manufacturing overhead
cost.

The term conversion cost is used to describe direct labor and

manufacturing overhead because these costs are incurred to convert
materials into the finished product.